Information Rules:

A Strategic Guide to the Network Economy

Standards Wars

Carl Shapiro Hal R. Varian

Examples

• RR gauges • Edison v. Westinghouse • NBC v. CBS in color TV • 3Com v. Rockwell/Lucent Information Rules 2 Spring 98

Classification of Wars

Compatible Incompatible Compatible Rival Evolution E Incompatible Revolution v.

Evolution Information Rules 3 Evolution v.

Revolution Rival Revolution Spring 98

Examples

• Rival evolution – Video machines • Rival revolutions – DVD v. Divx, high density disks (JAZ, etc.) • Evolution v. Revolution – Windows 98 v. Rhapsody Information Rules 4 Spring 98

Recent Standards Wars

• AM stereo – Auto industry invested, radio didn’t • Digital wireless phones – Europe: GSM – US: GSM, TDMA (cousin of GSM), CDMA • TDMA: 5 million • CDMA: 2.5 million • GSM: 1 million Information Rules 5 Spring 98

Standards Wars

• Ericsson (TDMA) has AT&T, SBC , Bellsouth • Qualcom (CDMA) has Bell Atlantic, US West, etc – Performance play strategy • How big are the network externalities?

– Geographic scope – Investment is sunk, systems interconnect Information Rules 6 Spring 98

Standards Wars, cont’d.

• 56K modems – US Robotics x2 attempted preemption – Rockwell/Lucent K56 Flex – Expectations management, switching costs – Settled Dec 97: estimated will triple size of market Information Rules 7 Spring 98

Key Assets

• Control over an installed base • Intellectual property rights • Ability to innovate • First-mover advantages • Manufacturing • Strength in complements • Reputation and brand name Information Rules 8 Spring 98

Two Basic Tactics

• Preemption – Build installed base early – But watch out for rapid technological progress • Expectations management – Manage expectations – But watch out for vaporware Information Rules 9 Spring 98

Once You’ve Won

• Stay on guard – Minitel • Offer a migration path • Commoditize complementary products – Intel • Competing against your own installed base – Intel again – Durable goods monopoly Information Rules 10 Spring 98

Once You’ve Won, cont’d.

• Attract important complementors • Leverage installed base – Expand network geographically • Stay a leader – Develop proprietary extensions Information Rules 11 Spring 98

What if You Fall Behind?

• Adapters and interconnection – Wordperfect – Borland v. Lotus – Translators, etc • Survival pricing – Hard to pull off – Different from penetration pricing • Legal approaches – Sun v. Microsoft Information Rules 12 Spring 98

Microsoft v. Netscape

• Rival evolutions • Low switching costs • Small network externalites • Strategies – Preemption – Penetration pricing – Expectations management – Alliances Information Rules 13 Spring 98

Lessons

• Understand the type of war – Rival evolution – Rival revolution – Revolution v Evolution • Strength depends on 7 critical assets • Preemption is a critical tactic • Expectations management is critical Information Rules 14 Spring 98

Lessons, continued

• When you’ve won the war, don’t rest easy • If you fall behind, avoid survival pricing Information Rules 15 Spring 98